Cryptocurrency in divorce proceedings

January 20, 2022 11:10
Photo: Reuters

I suspect my spouse owns cryptocurrency. What does this mean for my divorce?

Cryptocurrency is a fast-growing industry and one which is still poorly understood by many people. It also comes in many forms: there is Bitcoin, Ethereum, Dogecoin, Tether, Dash and Litecoin to name a few, and the more it is in common use, the more valuable it has become. For example, at the end of 2021, there were over 300 million crypto users worldwide, and the current value of all cryptocurrencies in circulation is over US$2.5 trillion. Given that it is widely used and can have significant value, it has become an important consideration in the division of assets in divorce proceedings.

However, unlike other forms of property, cryptocurrency allows billions of dollars to be stored without ever touching a bank account. If your soon-to-be ex-partner has made a fortune with Bitcoin, how do you get a share? Conventional approaches to obtaining disclosure of assets and instructing experts have had to be adapted due to the unconventional nature of cryptocurrency.

Disclosure of Cryptocurrencies

During divorce proceedings, each party must complete a financial statement known as a Form E to provide full disclosure of their means, both capital and income. There is an ongoing duty to provide full and frank disclosure of assets and financial resources, including holdings of any and all cryptocurrencies. Bitcoin addresses and exchange statements should be provided to evidence holdings.

It is important to ask the right questions at an early stage of the disclosure process. Open questions relating to the existence of any crypto assets, online accounts with exchanges, or the location of any digital currency wallets need to be asked. Failing to provide full and frank disclosure will place parties in contempt of court, risking a fine and even potential imprisonment.

There may be indicators of undisclosed cryptocurrency, based on disclosure already given, or from a party's knowledge. There may be wealth that seems incommensurate with the sources of income and assets held, necessitating further disclosure. If the required disclosure is not forthcoming or does not evidence the purchase of cryptocurrency, it may be necessary to seek an Order from the Court for specific disclosure from the party suspected of holding the investment or even from relevant third parties.

If there is evidence of dissipation it may be possible to seek a Court injunction freezing the assets of the other party and, if necessary, seeking to cover cryptocurrency exchanges so that the investment cannot be traded. It may be necessary to take steps to physically secure the means of storage on which the private codes needed to make up a unit of cryptocurrency are stored, to prevent transfer or even destruction of the means of storage. The order may specifically preserve any computer, USB device or other form of device where the private keys to the cryptocurrency may be recorded and held.

Valuation of cryptocurrencies

Cryptocurrencies may be volatile, particularly if they are not pegged to a real currency. This makes valuation a particular issue for the court when it comes to ruling on a final financial award, and for family practitioners advising their clients. Bitcoin is a good example of this. Their value has risen and fallen sharply over time. In May 2010, two pizzas were purchased for 10,000 BTC, the first real-world transaction. If this amount was held in early 2021, it would be worth more than US$600 million.

The value of cryptocurrencies at the date of Form E could be significantly different from the date of settlement or a court hearing, and significantly different again at the date of implementation. At the very least a long-term view of pricing will be required and expert evidence may be needed to assist the court.

Dealing with digital-related assets split

If the crypto asset is divided between the parties, the risk or benefit of changes in value are shared. However, with its very specific market and specialised trading platforms, not everyone will want to take on a significant cryptocurrency investment. It may be more likely that one party retains all the cryptocurrency, offsetting it against another asset. This could be problematic in the likely event of fluctuation: what if one party walks away with real estate worth HK$50 million and the other with HK$50 million in cryptocurrency but the value of that currency drops significantly the very next month? Or they become an overnight billionaire? It is an established principle that where price fluctuations can be anticipated as part of the natural function of a type of asset, the court will not be prepared to entertain re-opening a case which is now ‘closed’ even when the price fluctuations prove to be extreme (whether for better or worse). In the event a hearing has concluded but an order is not yet made, or where an order has been made but not implemented, arguably there may be some scope to revisit the terms of the order. Legal advice should be sought urgently if this occurs.

Where disclosure is not an issue and where parties have reached a mutually agreeable settlement, a crypto asset is just another asset that will need to be divided between the parties. In other situations, it is important that the right questions are asked and that the courts take into account, when deciding the final ancillary relief award, the unique volatility of a crypto asset and a party's financial risk appetite to own crypto if they have not owned any crypto assets previously.

Crypto assets are still poorly understood by many people, particularly those who have not been following the meteoric rise and prevalence of these assets. It is all the more important therefore to instruct lawyers who appreciate the difficulties that they pose in terms of disclosure and in reaching a fair settlement.

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